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Tackling prevalence of fraudulent investment outfits in Nigeria

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In the last five years, Nigeria has made progress in the area of capital market development, though much is still desired. The menu of available asset classes has been expanded to include Exchange Traded Funds. The market infrastructure has been modernised and strengthened with the platforms for over-the-counter now established.

Regrettably, while these are encouraging developments, the country’s investment climate has continued to witness an increase in illegal fund managers (Ponzi scheme).

According to the yearly report of the Nigeria Electronic Fraud Forum, which was unveiled in 2017, the Nigerian investing public lost N11.9 billion to the Mavrodi Mundial Moneybox Ponzis.

Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. The organisers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk.

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Within the last few months, more illegal fund managers have adopted various strategies to collect money from would-be investors. Some of them engage in free seminars at their offices for people to learn more about their products and the money-making business.

Indeed, the proliferation of these unlawful investment outfits in the nation’s capital market across the country has become a source of worry for the entire capital market community.

Ponzi schemes came into limelight in the 1920s when a man called Charles Ponzi assured investors of 50 per cent returns on postage investment in England within 90 days.

Today, Ponzi schemes with all the illegality and promises of unrealistic returns have burnt the fortunes of many ambitious investors, who wanted to make huge profits without risk.

According to a finance theory, every form of investment comes with a certain level of risk. The only exception is investment in government securities such as Treasury Bills and Bonds, among others.

Even government securities, in reality, are prone to inflationary risk. In the case of Ponzi schemes, the popular saying in finance, “the higher the return, the higher the risk” does not apply, because these schemes often promise very high returns with little or no risk.

Here, investment funds are pooled with others, and investors receive returns that are paid from the deposits of new investors. Rarely is the money invested in real investment vehicles, much less ones that actually can return what is being offered.

In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors to create the false appearance that investors are profiting from a legitimate business.

The payments made by several gullible investors at the base of the pyramid, are used to settle maturing obligations to those at the top. For the scam to be sustained, the base must be continuously expanded through aggressive recruitment of new entrants.

For instance, SEC Kano zonal office, in collaboration with officials the Economic and Financial Crimes Commission (EFCC) visited virtually all major newspapers and radio stations in the metropolis, warning innocent Nigerians of the dangers of investing in Ponzi schemes.

Also, with the efforts of SEC, Abuja office, out of the six notable companies that engaged in Ponzi scheme in Kano at the beginning of the year, only one remains open.

They are, however, not open because customers are investing money, but are being besieged by people who want to divest as a result of sustained publicity on the dangers of such patronage.

It could also be recalled that one other prominent company MGB Global had around July this year, been sealed by the EFCC due to petitions by depositors whose demands for refunds could not be met by the company.

The other four- Bitcoin company, Money Rite, No Failure Development and X-World, have closed shop due to mounting request by the populace to withdraw what was collected from them in the name of investments.

The management of SEC said that the closure was to end unlawful activities of the companies against unsuspecting investors and, therefore, urged investors to ensure that they only dealt with fund managers that were registered with the commission.

“The accounts of the company have been frozen; the promoters have been arrested by the Nigeria Police Force and are undergoing interrogation.

“The commission wishes to notify the investing public that the company is not licensed to carry out investments business of any type and as such its operations are illegal.

“The SEC, therefore, advises the public to exercise due diligence and caution in the course of making investment decisions. The valid licences of lawful operators could be obtained on the commission’s website by members of the public to confirm the licences of firms with which they intend to carry out investment activities,” it said.

Speaking on the activities of illegal fund managers, the acting Director-General, SEC, Ms Mary Uduk, urged Nigerians to stay away from fake financial experts who would promise to double their money within a short time.

She said that the commission was committed to sensitising investors and protecting them from the antics of fraudsters, especially promoters of Ponzi schemes.

“We want to ensure that people do not fall victim to the antics of fraudsters who purport to be able to double any amount of money you make available to them as investment value.

“These fraudsters or promoters of Ponzi schemes are the false prophets of the investment environment; they are the ill wind that blows no good and at whose sight you must flee. They are to be avoided.

“This is one message you must take home to family, friends, relations and acquaintances in order to save them from the agony of loss of their hard-earned money,” she said.

Also commenting on the trend, the acting Executive Commissioner, Legal and Enforcement, SEC, Reginald Karawusa, said that the operations of illegal schemes in the last five years had swindled Nigerians of their hard-earned savings with promises of unrealistic returns on deposits.

Karawusa added that the SEC management was determined to address head-on the menace and further proliferation of Ponzi schemes in Nigeria.

In the case of Dantata Success, the commission said the company was shut down for carrying out investment operations that falls within fund management without registration with the apex regulator.

“They do not have registration with the SEC and the commission has powers according to Section 13 of ISA 2007, to shut down any company carrying out capital market activities without due registration. Nigerian laws provide that business activities in the country have to be regulated, in this case SEC is supposed to regulate them”, he said.

The strategy of the company is to solicit for funds from unsuspecting members of the public by enticing them with returns of monthly interest on investment of between 25 percent and 50 percent depending on the nature and investment type.

They also indicated a registration period of February 5 to 15, in one of their numerous notices directing all prospective customers to make deposits into their bank accounts.

The company sells its forms to prospective investors according to their investment plans ranging from N1,000 to N3,000. The minimum amount investable is N50,000, while the maximum is N5,000,000

The investment period of the scheme is pegged at a minimum of 30 working days to a maximum period of 12 months with offer of interest rates on short and medium term basis.

It claimed to be involved in trading, general merchandise supply, oil and gas, transportation, import, export and general contract.

The commission had established that the company’s activities also constituted an infraction of the Investments and Securities Act (ISA), 2007.

The SEC Management said the closure was to end unlawful activities of the company against unsuspecting investors and therefore urged investors to ensure they only deal with fund managers that are registered with the Commission.

“The account of the company have been frozen, the promoters have been arrested by the Nigeria Police Force and are undergoing interrogation.

The Commission wishes to notify the investing public that the company is not licensed to carry out investments business of any type and as such its operations are illegal.

The SEC therefore advises the public to exercise due diligence and caution in the course of making investment decisions adding that valid licence of lawful operators could be obtained on the commission’s website by members of the public to confirm the licences of firms with which they intend to carry out investment activities.

The SEC has continued the verification of claims of 4,160 unpaid investors of the illegal investment scheme organised by Dantata Success and Profitable Company.

The exercise commenced on Monday July 15th and is expected to last till Tuesday July 30, 2019, with 4,160 investors undergoing verification.

The investors are required to go along with the original receipts evidencing their payments or bank tellers for deposit into the company’s account, valid means of identification and bank account details.

The commencement of the verification exercise is sequel to the appointment of joint administrators/trustees for Dantata Success and Profitable Company and in pursuant to section 13 and 173 of the Investment and Securities Act, and consequent to an Ex parte Order granted by the Federal High Court, Kano.

Consequently, the commission warned Nigerians to desist from investing their money in investment schemes being operated by persons or organisations that were not registered to carry out fund management functions.

According to her, SEC has been doing a lot in terms of investor education to assist people understand issues surrounding the capital market.

“This is for the all-important purpose of ensuring that the gains of your participation, be these dividends, proceeds from share sales/transfers, etc accrue to you seamlessly without sweat and in the shortest time possible.

“The purpose is also to ensure that you do not fall victim to the antics of fraudsters who purport to be able to double any amount of money you make available to them as investment value.

Uduk added that the commission had undertaken various initiatives to make the capital market more user-friendly so that people can participate in it with greater ease, comfort and convenience.

The Chief Research Officer of Investdata Ambrose Omordion said: “Many people are patronising the outfit because the stock market is down. They don’t have knowledge of what the capital market is all about.

“SEC has warned that Nigerians should be careful about investing in these fraudulent outfits.“People that put their money in wonder bank are still complaining. Government should go and find out who are behind this scheme.”

“Again, government should make capital market more liquid so that people will not look for alternatives.”

The Managing Director of Cowry Asset Management Limited, Johnson Chukwu said that investors patronise Ponzi schemes due to ignorance and greed.

According to him, a lot of people who invest in the scheme do so for lack of knowledge of basic economics or business expertise.

“People invest in Ponzi schemes for two principal reasons; ignorance and greed. A lot of people who invest in Ponzi scheme do so for lack of knowledge of basic economics or business common sense.

“For instance, I am not aware of any business venture that consistently generates 50 per cent net annual return (Net Profit Before Interest and Taxes – NPBIT) on a yearly basis.

“So if a scheme is offering someone a monthly return of 5 per cent which amounts to an effective annual yield of over 60 per cent, it becomes obvious that such a scheme cannot sustain the payment from its income and therefore must be creating a deficit which can only be funded from contributions from other investors.

“The illusion of meeting such payments becomes punctured once the rate of contributions slows down, hence the crystallisation of the always impending default.

“The second reason is that of greed which makes informed people to believe that they can earn the return and exit the scheme before the bubble will burst but sometimes they also get trapped.

“The most appropriate way to checkmate Ponzi schemes is to create enough awareness of the modus operandi of such schemes so that the general public will understand that the rewards offered by Ponzi schemes are not sustainable and only serve as bait to attract uninformed investors.

“It may also be necessary for SEC to set up toll-free lines for investors to confirm the registration status of Investment houses seeking their patronage,” he added.

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The prolonged downturn in the capital market, induced by significant divestment by foreign investors and compounded by lingering liquidity tightness, waning public confidence, among others has led to significant losses by investors.

The stock market which remained bullish between December 2005 and March 2008, suddenly became bearish in April 2008 and has remained nearly so since then with only marginal recovery.

Unfortunately, with the unprecedented lull in the market, many investors have fallen victim of scams and Ponzi scheme outfits that suggest invested money will yield quick capital appreciation sometimes as high as 90 per cent of the original deposit. The law is very stringent on requirements for operating collective investment schemes in Nigeria.

The Securities and Exchange Commission (SEC), has not relented in its efforts at sealing up their premises and going further to educate and enlighten Nigerians on the dangers of such activities.

The commission has issued several warning notes to the investing public, urging them to refrain from investing their money in outfits not registered with the commission.

The SEC has also advised the public not to subscribe to any financial investment plan without first checking the registration status of the operating company on the commission’s website.

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